daniel chigunwe
Moneyweb
The rand has been strengthening, so of course analysts are now turning bullish on it.
How long and how much are anyone’s guess, but the rand’s trend is currently certainly towards strength.
Ironically, this hurts large swathes of the JSE’s listed companies – from miners that export, to global groups that are accidently listed here.
That’s the thing about being in an export-orientated country, the currency can cut into profits like a knife.
But which companies does this stronger rand benefit?
Simple: the importers.
Medicine importers: Not really big beneficiaries …
In medicine, most of the IP lies within what is referred to as the ‘active pharmaceutical ingredient’ (API).
Even local giants like Aspen Pharmacare (APN) are material importers of APIs, which they then combine and package into the medicines they sell locally.
Aspen is a complex one, as it operates across multiple territories, currencies and, indeed, even trades among itself and exports from South Africa.
Thus Aspen Pharmacare is perhaps a bad example of a ‘clean’ importer to start with.
A much cleaner importer is Adcock Ingram (AIP), which imports some APIs as well as other medical items, and only operates in South Africa. Indeed, Adcock Ingram’s FY23 integrated report shows that its sensitivity to a 10% stronger rand would have boosted its FY23 profits by around R31 million or around 4 percent (before tax).
Perhaps not gigantic, but this is likely due to hedges in place that will rollover in time.
Thus, if the stronger rand exists for an extended period, then these medical businesses could become nice beneficiaries. Though ‘single exit price’ may work against them here. In short, this is complex and I would not call these investments based solely on rand movements.
Clothing importers: Somewhat benefitting but diluted by exposure to credit and offshore …
Typically, clothing retailers import cheap clothing from (let’s be honest, mostly Asia), add a mark-up, and sell it to consumers for cash or with high-interest-rate loans.
While Truworths (TRU) and The Foschini Group (TFG) partake in this, both are mostly credit-orientated with large offshore operations. Also, The Foschini Group has gone through a period of localisation of its supply chain.
For these reasons, I doubt that these two groups will be major beneficiaries of any strong rand scenario.
Rather, Mr Price (MRP) – which runs operations that are exclusively in South Africa, sells mostly imported stock, and rings up mostly cash-based sales.
These attributes mean Mr Price could benefit substantially from a stronger local currency.
That said, digging into the detail reveals that this may not be very true in the short term. In Mr Price’s FY24 integrated report, it states that a 10 percent strengthening in the rand would see its foreign trade creditor balance improve by R58 million and forward exchange contracts by R122 million, or around 3-4 percent of pre-tax profits.
Technology importers: Major direct beneficiary!
South Africa is a net importer of technology. While software is imported, most software licence models work on monthly or annual licences and reset themselves to different forex levels quickly.
Also, software does not carry inventory, and thus has less real-world forex exposure than hardware importers.
Thus, the most exposed to currency in the tech space are the hardware importers (so-called, ‘hardware distributors’).
While Alviva and Datacentrix have both delisted from the JSE, the remaining hardware distributor on the local bourse is Mustek (MST).
Furthermore, digging into Mustek’s FY24 integrated report shows that a 10 percent stronger rand (versus USD and EUR) would have increased Mustek’s profits by R162 million. Is that a lot or a little?
Mustek’s FY24 pre-tax profits were only R40.1 million! A 10 percent stronger rand alone would have increased its profits by multiples of its reported number.
In the last 12 months, the rand is around 8% stronger relative to the US dollar and around 6% stronger relative to the euro.
Yet Mustek’s share price is down 9 percent over the same period!
EOH Holdings (EOH) and Datatec (DTC) may also benefit somewhat from a strong rand here, but the former is diluted by its majority services turnover and turnaround dynamics, while the latter is really a global player and South Africa is small in their lives.
Summary
While a stronger rand is generally good for our importers (and our consumers), most importers have (rightly) managed this risk carefully by putting hedges in place and are unlikely to benefit strongly in the short term.
If the stronger rand persists, then these hedges rolling over to lower levels should benefit them, but this is harder to call or quantify.
The exception to this may be Mustek, whose near-term profits could see a significant kicker from the strong rand, assuming its volumes, margins and logistics/port troubles can be navigated successfully.
Bongani Ndlovu